Explained: SEBI's changes on related party deals

A related party transaction is a business transaction that takes place between two entities that hold a pre-existing connection prior to the transaction. This connection and transaction is itself legal but needs to be properly disclosed as it can often come at the expense of minority shareholders of the companies. The lack of proper disclosure can also lead to a conflict of interest or legal complications.

Under the new rules, related parties include any person, organisation or entity that belongs to the promoter or promoter group of the listed company. Individuals, or entities, who either directly or indirectly hold a stake of 20 percent or more in the company during the preceding FY will be considered a related party. After April 1, 2022, the portion of the stake being held by an entity before they are considered a related party will be reduced to just 10 percent.

Under the new rules, companies will need to provide an explanatory statement to their shareholders in the Related Party Transactions (RPTs) notice. Additionally, companies will have to comply with the new specified format for reporting of RPTs to stock exchanges.

Under the new rules framework for RPTs, all transactions will need to be approved by the audit committee as well as the shareholders of a listed company. Companies have been asked to provide details like the particular terms of the intended transaction, the name of the related party and the nature of its relationship with the listed company or its subsidiary.

Additionally, if the transaction is in the form of loans, inter-corporate deposits, advances or investments, then companies will need to provide the source of funds being used in the transaction.

Moin Ladha, Partner, Khaitan & Co, told Hindu BusinessLine, “While the amendments aim to ensure better corporate governance and availability of relevant material to be considered by audit committees before granting its approval, this will certainly increase their time and effort involved in case of complex transactions.”